Sabic crests the wave
In what is the biggest deal so far in the Gulf capital markets this year, Saudi Basic Industries (Sabic) bought out American giant GE’s plastics division. By Barry Marshall.
The deal involved more than US$6bn in debt. It was a major test of the ability of the GCC markets to raise such massive sums on a non-recourse basis. Several years ago, a deal like this simply would not have got done. Not only was it a monster acquisition financing, but it also occurred at a time when the markets were reeling from a series of credit crunches, meaning the deal was also a test of the resilience of the Gulf.
GE put the plastics unit up for sale because rising crude prices had cut into its profits. Sabic, being closer to Aramco feedstock, saw an opportunity to expand production. By exploiting the natural gas released during oil extraction, it can achieve lower costs than its European and US counterparts. Sabic hopes to turn the plastics division into a US$20bn per year company by 2009.
The purchase of the division presents Sabic with a footing in polycarbonates, malleable plastics used widely, for example, in CDs. GE's famous Lexan plastic is used in roofs, lighting, walkways, windows and domes.
Sabic, which first opened outside the Middle East in Germany and the Netherlands in 2002, also gets plants in more than 20 emerging market countries, including China, India, Brazil and Thailand.
The group, through its European subsidiary, was in the market in 2006 with a US$1.25bn loan that refinanced the remainder of a €2.35bn facility from 2002, which had funded the acquisition of DSM Petrochemicals. Last year's facility closed oversubscribed, meaning it found a better reception than the 2002 line, which did not syndicate well. The parent entity was also out in 2006 with a US$1bn facility that market chatter said had run into some resistance.
At launch, Sabic was at pains to underline its commitment to support the acquisitions through the cycle, meaning the deal was never going to be treated as a typical LBO. The majority state-owned group underlined this point with calls to its relationship banks.
Although Sabic has structured the facility off-balance sheet, the strategic nature of the acquisition means relationship banks have largely treated the deal as Sabic, ie, sovereign, risk. Opening leverage was set at 7.5x and the facility was rated BB/Ba2 by Standard & Poor's and Moody's.
At the outset, the debt was originally split into a US$1bn revolver, a US$1.1bn term loan A, a US$3.2bn term loan B marketed in the US and a US$1.1bn euro dominated term loan B to be marketed in Europe. The A and revolving tranches were to be targeted predominantly at relationship banks and pay 150bp over Libor, while the B loan, pitched to attract funds, would pay 250bp. As well as bank lender fees there was an original issue discount for B tranche lenders.
Initial guidance on the bond was set at 10.25% for the US-targeted US dollar tranche but this was lowered thanks to a very receptive Middle East relationship audience, which viewed the deal as Sabic (A1/A+) risk rather than Sabic Plastics (B1/B+) risk. ABN AMRO, Citi, GE Capital, HSBC and JPMorgan were joint bookrunners for the transaction.
But even at this stage there were tweaks to the structure of the debt package. By July, when serious problems in the fixed income and wider credit markets were creating headlines around the world, different components of the financing were being changed. In the case of the euro tranche, it was dropped altogether.
Mutlaq Hamad Al-Morished, CFO of Sabic, said that the euro tranche was dropped due to high demand from the Gulf for the dollar bonds. Of the US$2.75bn equivalent bond issuance that had originally been planned, US$1.25bn was switched to the increased US$7.645bn loan package, which pays 125bp for the term loan A and 250bp for the term loan B.
Sabic cut the bond sale by almost half to US$1.5bn on concerns that global credit market fears sparked by the US sub-prime mortgage problems had tamed investor appetites. It was not the risk of Sabic itself: indeed, at the same time as the GE Plastics acquisition financings were being arranged, Sabic had sold SR8bn (US$2.3bn) worth of long-term sukuk in the KSA. These facilities, however, were on the back of the parent company's ratings and not through the Sabic Innovative Plastics vehicle.
"It's been very attractive to banks, across the loans as well as the bonds . . . but on the bond side it's missing those investors who would have otherwise come in calmer market conditions," an official said at the time.
At the same time as Sabic, a number of other high-yield leveraged buyouts were also tweaking their structures, or abandoning them altogether. CCM and KKR both delayed the financings of their respective acquisitions, Chrysler and Boots.
Al-Morished noted that "the revised financing structure was considerably cheaper than the original loan/bond split" and expressed considerable satisfaction in getting the bond issue executed in an otherwise closed market. "The success of the deal is testament to the Sabic name and its strong relationships with banks and financial institutions," he stressed.
In the end, the bond details were as follows: a US$1.5bn, eight-year non-call four Reg S 144a Eurobond issued in late August in line with revised price talk of 9.50%, equivalent to 486bp over Treasuries.
Sabic signed the final US$6.65bn loan supporting its acquisition of GE Plastics through MLAs Citi, ABN AMRO and HSBC. Though initially aimed at both banks and funds, the fall-out from the leveraged market meant that the deal was taken up predominantly among Sabic's relationship banks, with just three funds joining. In total, 48 institutions make up the lending syndicate. The support in the bank market meant Sabic was able to reduce its bond offering to US$1.5bn from US$2.77bn and increase the loan.
The loan is now split between a US$1.5bn term loan A priced at 125bp and a US$5.145bn term loan B priced at 250bp. In addition, there is a US$1bn less widely syndicated revolver priced at 150bp. Fees are believed to be 50bp and 90bp. Originally, the credit facility included a US$1.1bn term loan A, a US$3.2bn term loan B and a US$1.1bn equivalent term loan B. Of the MLAs, Citi provides US$250m with ABN AMRO and HSBC lending US$170m each. In addition, bond underwriter GE Capital provides US$170m, as does JPMorgan.
Calyon has a hold of US$500m, while Banque Saudi Fransi provides US$375m and Samba was allocated US$300m. Joining with holds of US$250m are Europe Arab Bank, Arab National Bank, Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, Riyad Bank, Saudi British Bank and SMBC. Standard Chartered joins on a US$220m ticket, with APICORP and RBS each providing US$200m. Mashreq has a hold of US$175m, while First Gulf Bank, Gulf Bank, ING, Natixis and the Saudi Investment Bank each take US$150m.
GIB joins with a take of US$115m, followed by ABC, BNP Paribas, Commercial Bank of Dubai, Qatar National Bank and Saudi Hollandi Bank each with takes of US$100m BBK joins with a US$85m take, with the Bank of Ireland providing US$70m.
On tickets of US$50m are Abu Dhabi Investment Company, ANZ, ABC UK and Intesa Sanpaolo. Arab African International Bank provides US$47.5m, CIC US$40m and Al Ahli Bank of Kuwait US$30m. Prudential and Union National Bank both join on US$25m tickets, while Protective is the second fund joining with a US$20m hold.
With holds of US$15m are Azure Funding Europe, Mega International and the National Bank of Kuwait. The Arab Investment Company provides US$7.5m, with the State Bank of India joining on US$5m.
One major point of the sale was to include institutional investors, which would be attracted by the high-yield pricing, but this did not happen. Across the board, it is now very difficult for private equity or LBO-style deals to attract high-yield investors. Most are waiting for market conditions to normalise before committing to new paper. High-yield debt had been supported by strong liquidity around the world, but that liquidity is now drying up. Still, that the deal got done in such turbulent conditions is testament to its viability and attractiveness.
Sabic vice-chairman and chief executive Mohamed Al Mady said in a statement: "We were able to secure the required financing due to the recognition of Sabic in the global financial and capital markets, the sound business profile of Sabic Innovative Plastics and its world-class diversified product portfolio.
"Hence, we successfully completed the deal on time, despite the prevailing turbulence in the global credit markets," he said. "This acquisition will further enhance Sabic's position amongst the leading global companies. "Our global manufacturing capabilities will be further expanded to include significant additional plants and compounding operations in the Americas, Europe and Asia Pacific regions.
"Sabic Innovative Plastics is another strategically important step in our global growth and ongoing commitment to serve our customers – both in terms of geography and in meeting their needs for innovative plastics solutions and products that deliver outstanding value", the CEO said.
Speaking of the deal, he added: "It's been very attractive to banks, across the loans as well as the bonds . . . but on the bond side it's missing those investors who would have otherwise come in calmer market conditions."